Chan: QE2 will increase property bubble risk

Hong Kong Monetary Association (HKMA) Chief Executive Officer Norman Chan warned Thursday that the US Federal Reserve's second round of quantitative easing (QE2) will add pressure to the city's asset market, particularly the property sector.

He said that HKMA "will take measures that are specific to the housing market if necessary. The risk of an asset bubble in Hong Kong's property market is rising."

The US Federal Reserve announced Thursday (Hong Kong time) that it would inject another $600 billion into the economy by buying up US Treasuries through June 2011. It hopes that the stimulus package can kick-start economic recovery.

Chan said that the decision, however, will put a lot of pressure on emerging economies and that global foreign exchange markets are likely to be volatile. He urged that investors act cautiously.

"HKMA will keep an eye on the market to ensure that local banks will not engage in over-expansion in the mortgage loan business. HKMA will adopt further specific necessary measures to contain property-related lending. However, HKMA will balance the home buying needs of local residents and the risk management needs of local banks in introducing these measures," Chan said.

Meanwhile, Financial Secretary John Tsang stressed that the administration will unveil further measures to contain soaring prices in local asset markets and appealed to investors not to engage in excessive speculation.

However, one asset manager China Daily spoke to predicted that the local stock market could rise as much as 30 percent as the equity market is flooded with liquidity.

"The current level of 24,000 points on the Hang Seng Index means that the market is trading at a price-to-earnings ratio of 15 times. As the current valuation level is still reasonable, we predict that the market can reach 31,200 points, which would value the market at a price-to-earnings ratio of 20 times," said BMI Fund Management President Patrick Shum. However, he did not provide a time frame for this prediction.

China Daily

(HK Edition 11/05/2010 page2)